ON DIRECTORSHIP is by PETER TUNJIC.

a leading voice in the re-discovery of what corporations are and why they exist.

Sep 6 Commercial Capitalism

Historians argue there have been several stages of capitalism— merchant capitalism, agrarian capitalism, industrial capitalism, global capitalism and financial capitalism.

The latest epoch is "decapitalism".

Decapitalism is marked by systemic negative return on capitals - where the value invested and stored in social, human, intellectual, natural and other forms of capital is greater than the value received from that investment and stored in the form of financial capital. Under the conditions of decapitalism financial capital increases but total value stored across all other forms of capital is in decline. The net out come is more money but less available value.

The antidote to decapitalism is commercial capitalism and a return to the laws of capitalization - the efficient accumulation, conversion and exchange of physical and social energy (value) stored in all capitals - natural capital, social capital, human capital, intellectual capital, manufactured capital and financial capital.

The key feature of commercial capitalism is the role of the modern corporation as the wellspring of the capitals. Under the conditions of commercial capitalism the corporation does not seek to maximize profit but rather create maximum value stored in all capitals. Their purpose is to exist and by existing obliquely grow the useful energy available to society. The genius of the modern corporation is not limited liability but the ability to accumulate, convert and exchange capitals independently and more efficiently than any individual.

Commercial capitalism conceives of the modern corporation as an autonomous energy conversion system subject to four principles:

corporations are virtual open systems

opens systems are subject to energy laws

energy equals value ( I use the terms interchangeably)

value is stored in the capitals

Viewed in this way, corporations exist through a process of efficient capitalization ( not unlike metabolism) - converting and exchanging useful energy (value) stored in various capitals and accumulating the same for later use. Corporations exist because they are able to convert the capitals far more efficiently than individuals and, as Coase argued, with less transaction costs.

The key to commercial capitalism is that not all capitals are created equally. Each form of capital has unique properties and characteristics that make them more or less useful. Value is created when capitals are converted and exchanged efficiently. This process is called "capitalization" and will be explored in future posts.

By converting and exchanging lower order/less useful capitals for higher order/more useful capitals with their surroundings - shareholders, customers, employees, suppliers and other groups - corporations are able to accumulate energy or value to maintain a long term existence independent of all other groups and entities. New commercial capitalism explains why and how corporation exist - because they are more efficient at converting capitals than individuals - something shareholder and stakeholder theories of the firm can not do.

The standard capitalist formula is not ROI but based energy returned on energy invested or VROI.

VROI is based on energy returned on energy invested or EROI the ratio drives the performance of all energy conversion systems. From steam engines to living beings to corporations. The difference is simply the form in which the energy is stored. But the principles are the same.

Broadly speaking, capitalism is commercial if the net energy, accumulated in all forms of capital, increases as a result of any process or transaction. That is, the energy invested in the process - the capitals exchanged with surroundings or expended on transaction costs - are less that the capitals returned by that process.

The key to understanding new commercial capitalism is that the universal measure of equivalence between all capitals is not money - it is energy or value. Energy, not money, is the currency of capitalism. Commercial capitalism conceives of money as a medium of exchange - not a symbol of all value. Money is simply one store of value and less useful than other stores of value. For example, money tends to exhaust its energy by use where as the energy stored in social and intellectual capital may increase through use.

Decapitalism if the process of converting capitals into money results in an VROI of less than 1. If this occurs the corporation has been effectively "decapitalized". This is because the corporation may have more financial capital, but in aggregate less total energy/value available to it to sustain its own existence. In other words, what the corporation exchanged for money, had more accumulated value/energy in it than the accumulated value in the money received.

Based on the principles of capitalization, economic systems that focus on money as a symbol of value such as financial capitalism and democratic or shareholder capitalism have little in common with capitalism. This is because the prioritizing financial capital blindly over other forms, can lead to an overall decline in capital in all its forms. This is a highly inefficient conversion of capital. More importantly, these forms of capitalism only realize a fraction of the potential of the corporation as an energy conversion system.

But what ever the impact of decapitalism on individual corporations, the biggest impact has been felt by society. My proposition is that the problems of social inequality is as much (if not more) a function of the decline in total capitals (and the useful energy, that but for de-capitalism, would have been available to society stored therein) as it is a function of the concentration of financial capital in the hands of so few. More on this soon.